At the end of last year, we shared some positive and interesting developments regarding French capital gains tax (CGT) applicable to non-French tax residents. News that these developments are now confirmed will be welcomed by many, given the impact successive rises in French CGT have had on the country's real estate market. We will certainly see some changing dynamics in the market...
Generally speaking, French CGT applies on a profit made on the sale of French real estate (including the sale of shares of a French or foreign company owning French real estate). Taxation applies on the net gain being determined by the difference between the acquisition price and the sale price after application of a taper relief (at various rates), which depends on the length of ownership of the property.
Under the current regime, no tax is due if the property is sold (or shares in that property are sold) after an extended period of ownership of 30 years. After 22 years of ownership, CGT is not due, but the "social contributions" remain payable (albeit with a higher taper relief available).
Since 2013, an extra tax applies on net gains (after application of the taper relief) which exceed €50,000. The rates are between 2% and 6% (the higher rate of 6% applies on gains which exceed €260,000).
So far, the rate of CGT tax depended on the tax residence of the seller: 19% for EU residents and residents of the European Economic Area (EEA), i.e. residents of Iceland, Norway, Liechtenstein (and in certain circumstances, when the gains are made directly, to Swiss residents due to a particular provision contained in the Double Tax Treaty signed with Switzerland); and 33.33% for residents of other states.
As of 1 January 2015, one single rate of 19% applies to all taxpayers regardless of their country of residence. The only exception is in respect of residents of one of the few countries seen by France as "uncooperative states or territories". In such a case, the rate is 75% (but this rate should decrease in the future, as it has been considered as excessive by the Constitutional Counsel).
Taxpayers who paid the higher rate of tax of 33.33% should be able to make a claim and ask for the reimbursement of the difference between the rate of 19% and the rate of 33.33%.
In addition to CGT, since 2012 social contributions are due at a rate of 15.5%. These contributions have been applied on (1) French rental income earned as of 1 January 2012 and (2) French capital gains on the sale, directly or indirectly, of French real estate and/or shares in companies owning French real estate on or after 18 August 2012.
As expected, in a very recent case dated 26 February 2015, the Court of Justice of the European Union (CJEU), (Case C‑623/13 Ministre de l’Économie et des Finances v Gérard de Ruyter), confirmed that the social contributions cannot apply, in particular, to non-French tax residents who are not subject to the French social legislation. In Europe, Article 13 of Regulation No 1408/71 provides that the persons to whom this Regulation applies shall be subject to the legislation of a single Member State only. This article lays down the prohibition against overlapping legislation.
EU residents who have paid additional social contributions in France on a sale of French property (or on French rental income) should be able to claim back from the French tax authorities any social contributions paid in the past.
This decision primarily concerns EU residents but should also benefit non-EU residents, as otherwise the different tax treatment it triggers could constitute a restriction on the freedom of movement of capital, contrary to EU law. In this respect, we believe that non-EU residents should also make a claim while the delay to make such a claim has not passed.
Non-French tax residents selling French real estate need to appoint a French fiscal representative to act as guarantor to the French tax authorities concerning the CGT liability. In particular, the fiscal representative will make the French CGT calculation, determine the costs of works which qualify as deductible capital expenditure and those which do not, prepare the CGT return and liaise with the notary through whom the tax due is paid. The fees of a fiscal representative are expenses (between 0.4% and 1% of the sale price) and have always been contested by sellers who did not have the choice to pay them.
The French tax legislation has been modified and since 1 January 2015 sellers resident in one of the States of the European Economic Area (EEA excluding Liechtenstein) are no longer obligated to appoint a fiscal representative on the sale of French real estate.
This good news also does not concern non-EEA residents, but, again, we believe there is no reason why non-EEA residents should be treated less favorably than EEA residents; it could be seen as a restriction on the freedom of movement of capital, contrary to EU law. The end of the fiscal representatives for any sellers should be soon...